Renewables Obligation certificate (ROC) values – Brexit and beyond
This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
The value of Renewables Obligation certificates (ROCs) is derived from the market demand for ROCs. Therefore, in terms of assessing the value of the ROCs, the key question is what the market demand is likely to be over an anticipated project lifetime.
Market demand for ROCs is largely determined by the annual Renewables Obligation (RO) set by the Department of Energy and Climate Change (DECC) which is calculated in accordance with Articles 8 to 12 of the Renewables Obligation Order 2015 (the 2015 Order).
Energy suppliers that are subject to the RO (the Suppliers) have to present the required number of ROCs to Ofgem each year. If a Supplier does not have enough ROCs to meet its obligation, it has to make up the shortfall by paying into a "buy-out fund".
Ofgem sets the buy-out price per ROC, adjusting it according to the retail prices index (RPI). The buy-out fund together with any interest accrued is then redistributed to Suppliers in proportion to the number of ROCs presented by them.
The procedure for setting the size of the RO is set out in Part 2 of the 2015 Order, and is required to be the higher of:
- a fixed target of a certain number of ROCs per MWh (the Fixed Target Calculation); or
- the anticipated renewable energy generation plus a 10% "headroom" to ensure that demand exceeds anticipated supply (the Headroom Calculation).
Brexit and the immediate aftermath
The legal scenario is currently unchanged as the 2015 Order remains in force. It will continue to apply until specifically amended or revoked by the Government and the RO levels set out for 2016/2017 will therefore continue to apply.
Post-2017
The RO scheme is set to close to new entrants in 2017 and will come to an end in 2037. In 2010, the end date was extended from 2027 to 2037 for new projects with a view to providing long-term certainty for investors and to ensure continued deployment of renewables to meet the UK's 2020 renewables target. The UK Government has provided details on the proposed changes to the RO system following the 2017 switch. In doing so, they have divided the transition process into two stages – the period between 2017 and 2027, and the period beyond 2027.
This is potentially in anticipation of the fact that there will be sufficient RO projects in existence for a viable and worthwhile marketplace for ROCs to exist until 2027. However, by 2027, a number of the RO projects will have reached the end of their mechanical life and will drop out of the system, which is expected to lead to Contracts for Difference (CfD) projects significantly outnumbering RO projects by 2027.
2017 to 2027
In order for the value of ROCs to be sustained beyond 2017, the demand for ROCs will need to continue as anticipated and money will therefore need to continue to be paid into the buy-out fund.
The Fixed Target Calculation is set to potentially lose its relevance in 2017, as the RO will potentially no longer represent the entirety (and, in time, even the majority) of the UK’s renewable generation owing to the simultaneous operation of the RO scheme and the CfD schemes.
As a result the Government plans to use the Headroom Calculation solely for the period between 2017 and 2027 to ensure that the demand for ROC's is always higher than anticipated supply. Suppliers are therefore expected to be required to continue to maintain a share of their generation from renewable energy sources and be subject to continued penalties, should they not achieve the RO. ROCs should therefore keep their value between 2017 and 2027.
2027 to 2037
In 2027, RO projects will be transferred to new "Fixed Price ROCs" in which the price of the ROCs will be fixed until 2037. This is on the basis that the Government does not expect the ROC values to fall below the buy-out price or for there to be an oversupply of ROCs during this period. The Government will buy the ROCs directly from the generators to reduce volatility in the final years of the ROC mechanism and to protect existing power purchase agreements (PPAs) from the impact of change in law provisions.
DECC's announcement of fixing ROC prices from 2027 suggests that it will continue to set the annual obligations using the headroom mechanism and ROC values will vary each year depending on achievement against these targets. Clause 32N of the Electricity Act 1989 (as inserted by clause 56 of the Energy Act 2013) provides for introduction of the "fixed price scheme"; however the details are currently awaited.
This is, however, as always subject to changes in Government policy and clearly with the current situation having taken everyone, including the Government, by surprise, we have no idea in what direction a new Prime Minister and Cabinet may take the UK's energy policy.
